1 Pontifícia Universidade Católica do Rio Grande do Sul FACULDADE DE ADMINISTRAÇÃO, CONTABILIDADE E ECONOMIA PÓS-GRADUAÇÃO TEXTO PARA DISCUSSÃO Nº05/2007 TRADE AND ENVIRONMENT: THE EFFECTS OF MERCOSUR-EU AGREEMENT UPON AGRICULTURAL SECTOR ON BRAZIL Augusto Mussi Alvim Flávio Tosi Feijó Porto Alegre 2007 Campus Central Av. Ipiranga, 6681 P. 50 CEP: Fone: (51) Fax (51)
2 TRADE AND ENVIRONMENT : THE EFFECTS OF MERCOSUR-EU AGREEMENT UPON AGRICULTURAL SECTOR ON BRAZIL 2 Augusto Mussi Alvim 1 Flávio Tosi Feijó 2 ABSTRACT: This paper aims to identify the effects of free trade agreements upon grains and meat production and environment in Brazil. To analyze the impacts of free trade agreements in the agriculture sector and environment in Brazil, we consider three scenarios: first, free trade agreement in multilateral scope, where the duties are eliminated from all regions; second, free trade agreement between Mercosur and EU countries, where just the duties from Mercosur-EU countries are eliminated; and third, a free trade agreement between Mercosur and EU, where the duties are eliminated and there are imposed taxes to the pollution sectors in the Mercosur countries. In the first scenario the most important gains are in the bovine, pork and poultry, corn and oilseeds sectors. The production and consumption of energy increased in Brazil which suggests major damages to the environment. In the second scenario, there are gains to all agricultural segments, exception made to the oilseed sector which maintains the same production. The main gains in Brazil are in the corn, bovine, pork and poultry sectors. In this scenario it occurred a decrease in the consumption and production of energy in Brazil which signalizes less damage to the environment. In the third scenario there are gains for most of the agricultural sectors, however they are smaller when compared to the second scenario. The consumption of energy reduces in this scenario which suggests fewer damages to the environment than in the other scenarios. Finally, the main results contribute to reaffirm the position of the Brazilian Government which is looking for a freer trade with less subsidies. Key-words: grains, meat, free trade and Mercosur-EU agreements. 1- INTRODUCTION Since 1990 s the Brazilian government and the other Mercosur countries have started together to look for new agreements to freer the trade. The main motivation to seek for new agreements is stimulating trade with third countries and, as a result to promote the economy growth in Mercosur countries. However, an increase in trade may affect the environment. For this reason, the benefits of trade may be associated to damages in the environment. Examples of this sort of damages are gas emissions, soil erosion, deforest and water resource degradation. In the agricultural sector, for example, a company may produce goods and damages in the environment, even though not included as company costs. In this case we have negative externalities, when economic activities result in goods and some damages to the environment. There is a possibility that a company produces goods and benefits to the environment, resulting in a positive externality. 1 Doctor in Economics. Professor of Economics in Pontifical Catholic University in Rio Grande do Sul (PUCRS) Brazil. Address: Av. Ipiranga, Partenon Porto Alegre. Brazil. 2 Doctor in Economics. Professor of Economics in Foundation University Federal of Rio Grande (FURG).
3 The main instruments to regulate and to control the negative externalities are the taxes and subsidies. These variables affect production, consumption and trade differently (KRISSOFF, BALLENGER e DUNMORE, 1996). The taxes may be used to reduce the activities that cause environment damages, promoting the use of clean technologies, using less polluting inputs and reducing the use of natural resources. However subsidies promote compensation to companies to reduce pollutions. At one extreme, free trade agreements can push the economic growth and result in an inductor of environment damages. In the other extreme, the environment legislation can minimize the negative externalities that come from production and trade, reducing the production level (FEIJÓ e AZEVEDO, 2006). An example of this situation which associates environment aspects with trade can be evaluated in a study on the grain sector (oilseeds, maize, rice and wheat) and meat sector (bovine, pork and poultry) in the Mercosur and EU countries. While Europeans have established more and more barriers upon agricultural products from developing countries, in the Mercosur countries there is fundamental increase in the competitiveness to compensate the subsidies to agriculture given by the developed countries. For this reason a major production in Mercosur countries is correlated with deforest, water resource pollution and an intensive use of soils and other production factors (BRAGA e MIRANDA, 2002). In this paper we aim to evaluate the main impacts of new trade agreements to identify the gains and losses in each sector and region. This result can show the effects from each scenario upon production, trade and environment. Specifically in the environment analysis, we consider the energy sector behavior as a proxy of changes in the environment. Associating a large (small) use of energy, we have a new combination of production factors, which can be related with a large (small) intensive use of production factors (air, soil, water and forest). Consequently, major (minor) energy consumption in selected economies may be associated to large (small) environment degradation 3. The remainder of this paper is organized as follows. Section 2 presents the equilibrium general model and the main alternative scenarios. Each scenario evaluates the gains and losses in production, welfare and environment with multilateral and regional dimensions. The final section summarizes the results and implication for the agricultural sector in an alternative scenario. 2- METHODOLOGY In this paper it was used the Global Trade Analysis Project (GTAP) developed by Purdue University in Indiana/USA. We do not describe the GTAP model in detail, because its fundaments are described in Hertel (1997). However it is important to give a general view of how this model works. GTAP is a computable general model applied to multiregional, considering constant returns of scale and perfect competition in production activities 4. The functionality of a global economy in GTAP can be explaied, when it is considered an arbitrary region and its relationships with other regions, imposing some condition of equilibrium to the global agents. In each region, there are j industries using i primary and intermediary factors, which are local produced or imported. The primary factors belong to the domestic agents 3 To evaluate the environment impacts, we consider that the available technologies are constant and the changes in energy consumption are related to environment adjusts. 4 More recently the GTAP Model has considered the imperfect competition in its formulation (François, 1998), however this demands additional data. 3
4 (They are represented by regional agents), who receive all collected taxes and make all transfers to other regions or countries. The agents allocate their revenues to private consumption, government consumption (financing the entire government expenditure) and saving. The government uses the financial resource available by a regional agent to buy goods and services (local and imported). The tributary system considers a tax in each transaction and transfers this revenue to an agent by lump sum transfers. The traders buy merchandises for market prices, pay taxes to the tributary system and sell goods to a global agent. The global traders buy goods from exporting regions and sell to importing regions. In this transaction, the transportation system assembled in a global transportation sector is used. Similarly, the importers buy products from different regions around the world from global traders, pay taxes to the local government and sell their merchandises to domestic agents for market prices. 2.1 Closure The Macroeconomic closure of GTAP is defined by a neoclassic approach. It is consider neoclassic because the investments are fixed adjusted according to savings variation. The non-fixed production factors are capital and labor (qualified and non-qualified). The mobility grades of these factors are guided by constant transformation elasticity. Land and ntural resources are production factors considered fixed in this model. 2.2 Regional and Sector Aggregation The regional aggregation used in this paper was designed to permit an integrated evaluation of a free trade agreement involving Mercosur and EU regions. 87 countries were assembled in 9 regions using the GTAP Model version 6 (Table 1). The main criterion to aggregate was the existence of regional agreements and a trade link between Mercosur and EU countries. The regions considered in this paper are Brazil, other Mercosur countries (R. Merc), European Union (EU), North American Free Trade Agreement (NAFTA), other countries of Free Trade Area of America (R. FTAA), China, some other countries from Asia, Russia and some other countries of the world. The activities were assembled in nine sectors, focusin grains and meat products (bovine, pork and poultry). That is, 57 industries were aggregated in nine sectors. This Aggregation permits to focus the analysis on grains and meat sectors in Mercosur and EU countries. INSERT TABLE Alternative s In table 2, we present the main alternative scenarios. The first scenario considers a multilateral agreement where all trade barriers are eliminated. The main objective of this scenario is to make possible to compare multilateral effects with regional effects of a free trade agreement. In the second scenario we consider the elimination of tariff barriers without any compensation for possible damages in the environment. In the third scenario we consider the elimination of tariff barriers and the payment of taxes by sectors that use energy intensively. The aims of these taxes are to compensate the possible damages due to the incrase in the production activities. 4
5 INSERT TABLE 2 In the next section we present the main results. Upon the base scenario three alternative scenarios are simulated and the main results are presented after that section. 3- RESULTS In this section we present the main results for three alternative scenarios: a multilateral free trade agreement (scenario 1); a regional free trade agreement between Mercosur and EU countries (scenario 2); and a regional free trade and environment agreement between Mercosur and EU countries (scenario 3). In each scenario we evaluate the changes in production in Brazil, other Mercosur countries and EU, the changes in trade flows between Brazil and other regions and the main impacts upon total welfare in each country and region are considered in the article. At the beginning was possible to evaluate the changes in production in scenario 1. In this scenario there are gains to the agriculture sector in Brazil when the trade barriers are eliminated (vide table 3). The segments most favored in Brazil are meat, pork and poultry sectors, where production increases 17.9% and 5.6%, respectively. There is also a significantly gains to maize and oilseeds sector, increasing of 15.2% and 7.5%, respectively. As a result of these changes the energy production increases in Brazil, mainly as a consequence of a major production of grains and meat. INSERT TABLE 3 An opposite situation occurs in the EU countries where the agricultural production is negatively affected. In scenario 3, the European production of rice, maize and bovine meat was reduced in 71.1%, 8.7% and 12.4%, respectively. Even though the industrial and service sectors have an increase of 0.2% in production, the energy sector in EU has a smaller production, being reduced 0.85% in this scenario. The behavior of energy sector was determined by a considerably reduction in the agricultural production as mentioned above. The other Mercosur countries have a similar performance as verified in the Brazilian agricultural sector. For these countries the production of rice, maize, soybeans, meat and pork and poultry production increase in 8.42%, 8.98%, 9.53%, 4.86% and 1.22%, respectively. The increase in the energy sector in scenario 1 is 2.53%. Similarly to Brazil, the increase in production of energy is a result of a larger agricultural production. It is important to remember that a major production in the agricultural sector affects other activities that support or trade with the agricultural sector, directly or indirectly. This explain the relationship among agricultural and energy sectors. For this reason an increase in the energy demand by Mercosur countries signalizes losses to the environment as result of intensive use of production factors (land, water, forests and other natural resources) or even an increase in gases emission in the atmosphere. In the case of EU countries, when the production of energy reduces in scenario 1, it signalizes a diminishing in the use of the production factors and gains to the environment as a result of a less intensive use of these inputs. In scenario 2 some sectors increase the production in Brazil, for example, maize (5.7%), wheat (1.7%), bovine meat (19.9%) and pork and poultry sector (9.4%). In general terms, the changes in scenario 2 are smaller than in scenario 1, although the wheat sector has an opposite performance in scenario 2. 5
6 The other Mercosur countries have a major part of analyzed sectors present gains in this scenario, exception to wheat, energy and other sectors. The production of selected products has an increase in production, for example, rice (3.9%), maize (3.4%), bovine meat (4.9%), pork and poultry (2.6%) and other agricultural sectors (3.1%). In EU countries there are losses to almost all sectors, exception to oilseed and other sectors. The major losses can be observed in maize and bovine sectors, the production level was reduced in 1.8% and 5.9%, respectively. These results are consequence of a comparative advantage of Mercosur countries in agriculture production and as result of a high protection level imposed by the EU countries in the scenario base. At last, the energy sector in scenario 2 shows reduction in the activity level to Mercosur and to EU countries. The energy production in Brazil and other Mercosur countries decrease, mainly because the sectors that are intensive in energy use (industry and service) have their activities and energy consumption reduced and non-compensated by the increase in consumption of energy from agribusiness sector. The reduction in energy production in Mercosur and EU countries, keeping constant the production level in other countries and regions, signalizes this agreement as positive to the environment protection. However, the environment benefits in EU come from a reduction in agricultural production, while the environment benefits in Mercosur countries come from a reduction in industry and services ( Other Sectors ) production. The scenario 3 considers duties elimination in Mercosur and EU countries, with output taxes upon energy sector consumers. In this scenario the changes in production are smaller and restricted to countries which take part in this agreement (vide table 1). In the case of Brazil, the sector most negatively affected is the oilseed, which was reduced in 2.1%, keeping a smaller positive growth in production compared to other sectors. As example of this behavior, the production of maize, bovine meat, pork and poultry increase 4.9%, 19.3% and 8.2%, respectively. Table 3 also indicates the main changes in production for other Mercosur countries. For this region and alternative scenario, the following activities have an increase in the production: rice (2.8%), maize (1.7%), bovine meat (4.0%), pork and poultry (1.7%) and Other Agricultural Sectors (1.3%). In the case of the EU countries there are principally losses in scenario 3, exception to oilseed and Other Sectors. The most negatively affected activities are maize (1.7%) and bovine meat (5.8%). In this scenario to Brazil and other Mercosur countries, there is less energy consumption because taxes were imposed to the consumer energy sectors. These aspects contribute to minimize the possible negative environments growth effects from Mercosur-EU agreement. In the case of the EU countries the energy consumption diminishes because the agriculture sector reduces the production and the use of energy, non-compensated by other sectors in the EU economy. These results permit to affirm that a net reduction in production in the Mercosur and EU countries, keeping constant the consumption in other regions, signalizes the benefits of these agreements in both dimensions: trade and environment. In this agreement it is possible for Brazil to have gains from trade as a result of more access to the EU market. Simultaneously, there is a decrease in the use of energy in the Mercosur countries, which signalizes benefits to the environment in this region. Table 4 indicates the main changes in trade between Brazil and other Mercosur and EU countries in each alternative scenario. In scenario 1, the increase in trade from Brazil to 6
7 EU countries is the most significant. The total Brazilian exportation to the EU in this scenario is US$ 3.4 billions, while the maize, bovine meat, pork and poultry meat and Other Agricultural Sectors increase in 41.6, 1,832.7, and 1, millions of dollars or 33.9%, 302.9%, 112.8% and 27.5%, respectively. INSERT TABLE 4 7 In the case of EU countries, it is possible to observe an increase in exportations to Brazil. In this scenario the total imports from Brazil raise 4.2 billions of dollars. The main imported products belong to the following sectors: Other Agricultural Products, energy and Other Sectors, increasing (33.1%), (4.3%) e 3, millions of dollars (18.37%), respectively. The exportation from Brazil to other Mercosur countries was reduced in millions of dollars, mainly because there is a decrease in Brazilian exportation of Other Sectors. However, the total Brazilian importation from other Mercosur countries rises in millions of dollars. The main products imported from Brazil belong to the Other Sector group, but the importation of rice, maize, wheat and bovine meat from other Mercosur countries also increase 5.7%, 5.7%, 5.6 and 11.3%, respectively. Table 4 also indicates the main results to scenario 2. In this scenario there is a trade deviation as a result of the agreement between Mercosur and EU. For example, the Brazilian exportation to EU increases in 4.85 billions of dollars and the Brazilian importation from EU rises in 9.9 billions of dollars. Nevertheless the trade flows between Brazil and other Mercosur countries decrease in this experiment. The Brazilian importation to other Mercosur countries reduces in millions of dollars and the Brazilian exportation decreases in millions of dollars. The most negatively affected region in this scenario is NAFTA. For this region, the brazilian total importation is reduced in 1.98 billion of dollars and the brazilian total exportation is also reduced in 0.7 billions of dollars. The other regions considered in this paper have fewer losses than NAFTA, but the exportation and importation from Brazil are also reduced. In this scenario the main Brazilian products exported to EU are rice, maize, bovine meat, pork and poultry meat and other agricultural products, raising 0.66 (95.0%), (43.25%), 1, (323.8%), (128.9%) e 1, (41.4%) millions of dollars. On the other hand the Brazilian importation from EU increases 0.14 (29.6%), (45.4%), (40.4%) and 8, (41.0%) millions of dollars. The scenario 3, also related in table 4, presents an example of trade deviation. When the Brazilian trade flows are analyzed in the scenario 3, it is possible to verify a raise in the total exported from EU, 4.0 billions dollars and a drop in the amount of imported products from EU, 9.5 billions dollars. Similarly to scenario 2, in this scenario the total imported and exported to other Mercosur countries is reduced to 1.6 and 1.1 billions of dollars, respectively. The main Brazilian exported sectors to UE in this scenario are maize, bovine meat, pork and poultry meat and Other Agricultural Products. The Brazilian exportation of products to EU increases, respectively, (41.8%), 1, (319.5%), (124.51%) and 1, (38.5%) millions of dollars. Though the Brazilian importation from EU also increases to oilseeds, pork and poultry meat, Other Agricultural Products and Other sectors in 0.14 (30.5%), (47.5%), (42.9%) e 9,512.9 (43.9%) millions of dollars.
8 Finally the main variation in welfare is decomposed by allocative effects, terms of trade and difference among investments and savings are presented in table 5. INSERT TABLE 5 The scenario 1 can be considered the best alternative to Brazil and to EU countries, once the main criteria to evaluate is the variation in total welfare. The major sources of gains come from a best resource allocation from multilateral free trade agreement. In this scenario, the total welfare in Brazil increases in 2.6 billions of dollars, while the total welfare gains to EU are 18.1 billions of dollars, when the tariffs are eliminated. In scenario 2, there are also gains in terms of welfare by region, though these gains are smaller than in scenario 1 to Brazil, other Mercosur and EU countries. These gains are from a better resource allocation and from an increase in the trade terms. An example of this occurs in the EU countries with an increase of 3.9 billions of dollars in welfare. It is important to emphasize that in this scenario the energy consumption in Brazil and in other Mercosur countries is reduced. This permits to assume a positive benefit to the environment when the agricultural activities become more extensive, producing less pollution. At last in the third scenario, it s possible to perceive fewer gains to Brazil in terms of total welfare than in other scenarios. For the other Mercosur countries this scenario permits to achieve the greatest gains in terms of welfare. EU countries also have gains in terms of welfare, though fewer than in other scenarios. In this sense, Brazil, other Mercosur countries and EU demonstrate gains in this scenario by 2,393.9, and 4,538.2 millions of dollars. 3 permits relevant gains to Brazil, other Mercosur countries and EU in terms of welfare. However, the most important result is a significant reduction in energy consumption, that permits a best combination between trade and the use of environment. The Mercosur-EU agreement with taxes applied to energy consumers reduce the competitiveness of Brazil and other Mercosur countries upon EU, but even in this scenario the Mercosur countries have a comparative advantage in the EU market. The taxes applied to energy consumers signalize what may happen, when at least part of the negative externalities in agricultural activities are computed and charged. In this scenario there are gains from trade and gains to the environment when taxes to energy consumers in agriculture are applied. 4- CONCLUSIONS This paper analyzed the effects of free trade agreements in two dimensions: trade (multilateral and regional) and environment. The main idea is to compare the potential gains (losses) from trade in different kinds of agreements including Mercosur and EU countries. When the energy tax in the third scenario is included, it is possible to measure the conjunct effects of trade upon environment in the analyzed economies. In the case of Brazil, the major variation in the agricultural production occurs in the second scenario (Mercosur-EU). In this scenario the most important changes occur in bovine meat, pork and poultry meat and other agricultural sectors. These activities represent 89.4% of the total agricultural production in Brazil and these increases in production were stimulated by a raise in trade flow with EU. The scenario 3 can be considered the best situation if the environment safety is taken as criterion. In this scenario it is possible to associate gains in production, an increase in total welfare and a decrease in environment damages. In this case, the variation in production is 8
9 smaller than in second scenario, but there is a minor consumption of energy by the agricultural sector. This behavior signalizes a better use of natural resources in Brazil than in other scenarios, associated with a significant increase in production, trade and welfare in Brazil, other Mercosur and EU countries. At last to Brazil the major increase in welfare happens in the first scenario (multilateral free trade), while the second best alternative to Brazil, using the same criterion, is the second scenario (Mercosur-EU). In both cases the welfare increases mainly because there is a better allocation of resources, stimulated by an increase in trade flows. In the case of other Mercosur countries, the major variation in agricultural production and welfare also occurs in the first scenario. In this scenario, the main sectors in terms of increase in agricultural production are: rice, maize, oilseeds and Other Agricultural sectors. Conjunctly, they represent 72% of the total produced in this region. However, the second best alternative in terms of welfare to other Mercosur countries happens in the third scenario. In this scenario even when a tax to energy consumers is imposed, the increase in total welfare is bigger than in the second scenario. The agricultural sectors in the EU had the production reduced in all scenarios. Even though in the third scenario there is a less negative impact to production than in the other alternative scenarios. When the welfare behavior is evaluated in each scenario, the first scenario is the first best option to EU. The second best alternative is the second scenario (Mercosur-EU). For every scenario, the allocative effects were the most relevant aspect to explain the significant variation in the EU welfare. Clearly, the best strategy to grain and meat sector in Brazil is to support the position of the Brazilian government on behalf of free trade agreements. These strategies search for a major access in third markets and for a reduction in EU subsidies to agricultural sectors. The trade agreements between Mercosur and EU confirm advantages to the agricultural sectors in Mercosur, even when taxes to energy consumers are imposed. For this reason the Mercosur countries should negotiate with EU a formal regulation for the sectors that affect the environment, because even in this scenario the gains from trade are positive and relevant. 9
10 5- REFERENCES 10 BRAGA, A. S., MIRANDA, L. C. (2002). Comércio e Meio Ambiente: uma agenda positiva para o desenvolvimento sustentável. Brasília: MMA/SDS. BURNIAUX, J.M.; TRUONG, P.T. (2002). GTAP-E: An Energy-Environmental Version of the GTAP Model. GTAP Technical Paper No. 16, Center for Global Trade and Analysis, Purdue University. Available in: Access: Dez/2003. CRAWFORD, J.; LAIRD, S. (2000) Regional Trade Agreements and the WTO. Nottingham: Center for Research in Economic Development and International Trade, University of Nottingham. FEIJÓ, Flávio Tosi; AZEVEDO, André Filipe Zago de. (2006) Comércio e Meio Ambiente: políticas ambientais e competitividade no Âmbito da ALCA. Revista de Economia Aplicada, São Paulo, v. 10, n. 04, p HERTEL, T. ed. (1997). Global Trade Analysis: Modeling and Applications. New York: Cambridge University Press. JANK, M. S. (Org.). (2005). EU-Mercosur Negotiations on Agriculture: Challenges and Perspectives. São Paulo: Instituto de Estudos de Comércio e Negociações Internacionais/Institute for International Trade Negotiations ICONE. KRISSOFF, B., BALLENGER, N., DUNMORE, J., GRAY, D. (1996). Exploring Linkages among Agriculture, Trade, and the Environment: issues for the next century. Washington: Economic Research Service/USDA. (AER-738). RAE, A.; STRUTT, A. (2006). The WTO, Agricultural Trade Reform and the Environment: nitrogen and agro-chemical indicators for the OECD. Centre for Applied Economics and Policy Studies. Palmerston North, New Zealand.
11 Table 1 Regional and Sectorial Aggregation - GTAP Regional Aggregation Sectorial Aggregation Brazil 2- Other countries of MERCOSUR (R. MERC): Argentina, Paraguay e Uruguay. 3- European Union (EU): Germany, Austria, Belgium, Denmark, Spain, Finland, France, Greece, Holland, Ireland, Italy, Luxembourg, Portugal, United Kingdom, Sweden, Cyprus, Slovakia, Slovenia, Estonia, Hungary, Latvia, Lithuania, Malta, Poland and Czech Republic. 4- North America Free Trade Agreement (NAFTA): Canada, United States and Mexico. 5- Other Countries of Free Trade Area of America (R. FTAA): Central America, Caribbean, Colombia, Peru, Venezuela, Andean Pact, Chile, Rest of South America. 6- China 7- Others Countries of Asia (R. Asia): Japan, Korea, Taiwan, Indonesia, Malaysia, Singapore, Thailand, Vietnam, India, Middle East, Hong Kong, Philippines, Bangladesh, Sir Lanka and Rest of South Asia. 8- Russian Federation 9- Other Countries of the World (R. World): Australia, New Zealand, Switzerland, Rest of Former Soviet Union, Rest of North Africa, Rest of South African CU, Rest of Sub- Saharan Africa, Albania, Turkey, Morocco, Botswana, Malawi, Mozambique, Tanzania, Zambia, Zimbabwe, Rest of SADC, Uganda, Rest of the World. 1- Rice 2- Maize Maize and other cereals. 3- Oilseeds Soybeans, Colza, Sunflower, Cotton, Linen and Canola. 4- Wheat 5- Bovine meat 6- Pork and Poultry 7- Other Agricultural Products Other grains, vegetables, fruits, seeds, sugar can, vegetable fiber, sheep, goat and horse meat, milk, wool, beetroot and silk. 8- Energy Source: Data from GTAP version 6. * GTAP data base does not include the Paraguay. Coal, raw oil, Natural gas, Derivates of Oil and Coal, Electricity. 9- Other Sectors Other natural resources, prosecuted foods, clothing, transport equipments, machines, intensive Industries in energy, other manufactures and other services.